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Office lease negotiations: What traps should a tenant look for?

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Martha K. Guy

Lease forms created by commercial landlords are typically absurdly one-sided. Nevertheless, tenants are often too quick to accept a landlord's "standard form" lease. This approach can lead to later regrets when costly issues arise.

A tenant should actively manage the lease negotiation by forming a team with a broker and an attorney, both of whom specialize in tenant representation. That team can then help the tenant to remove or mitigate the most egregious provisions. At a minimum, the tenant should be aware of the lease terms and make a business decision based on full knowledge of choices. Below are examples of potentially costly issues that should be addressed in any office lease negotiation:

• Construction and Delivery:

o The construction terms impact rent commencement, delivery date, and numerous other lease provisions and should, therefore, be fleshed out early.

o What happens if the landlord is late in delivering the premises? Address the possibility that the tenant would then be in holdover under its current lease and thereby paying greatly increased rent.

o What about construction allowances? If the tenant is responsible for over allowance amounts, require that the landlord's construction costs be competitive. In a tenant-build, will a landlord's "construction supervision fee" unexpectedly eat up the allowance?

o Is pre-delivery notice required so that the tenant has adequate time to move-in or to start its tenant improvements before the rent or rent-countdown starts?

• Project, Premises and Parking Rights:

o Most leases state the premises are delivered "as-is" excepting specified tenant improvements. However, shouldn't the landlord deliver the premises with mechanical systems (e.g., HVAC and lights) in working condition and in compliance with ADA and other code requirements? Get delivery warranties and future maintenance requirements so that the condition and level of service that made the location initially desirable to the tenant are maintained.

o How are the premises measured? The method used can significantly impact the rent, tenant's percentage obligation for operating costs, and any construction allowances provided.

o Will the tenant need the ability to expand or contract the space as its business expands or contracts? Negotiate these rights at the outset, while bargaining power is strong.

• Term:

o When is the rent commencement date? Tenants are often surprised to find that rent commences earlier than they expect.

o Are there options to extend? It is important to detail all terms of the option in the lease (versus "agreeing to agree") in order for the tenant to have an enforceable right of extension.

• Rent, Operating Costs, Taxes and Insurance:

o Tenants often focus only on the base rent number. However, in almost all cases, the tenant is also responsible for a proportionate share of real estate taxes, common area maintenance expenses and insurance expenses—either in total (triple net lease) or to the extent total costs exceed a base amount (modified gross lease). These additional pass-through charges can be substantial. Obtaining estimates and prior cost reports, imposing caps on increases, and excluding inappropriate costs are typically heavily negotiated.

o If the real property is transferred during the term, the tenant can be surprised by a large "change of ownership" increase in taxes. Prohibiting or limiting pass-through of these increases is ideal, but, if unavailable, the likelihood of a transfer of the property during the term should be evaluated.

• Services and Utilities: Does the landlord use the ability to charge for "over-standard" and after-hours utilities as a profit-center?

• Insurance and Indemnity: Carefully analyze landlord's typically one-sided lease provisions regarding insurance, indemnity, waiver of claims, waiver of subrogation, and repair and reconstruction. These provisions often impose liability on the tenant for potentially devastating risks of loss. Also, seek rent abatement in a casualty event where the premises are unusable.

• Assignment and Subleasing: A tenant may need to assign as an exit strategy or because of a sale of the business. A tenant may also need to sublet to address changes in the amount of space it needs. Minimize the restrictions on assignment and subletting so that they do not go beyond the landlord's legitimate interests.

• Relocation Rights: Landlord lease forms often include a right for the landlord to move the tenant to another space. Obviously, this should be removed or significantly limited!

• Surrender Condition: The tenant will want to simply turn over the keys at the end of the lease. Landlord forms, however, often require the tenant to repaint or recarpet the premises and remove tenant improvements or alterations at expiration. Tenant protections need to be negotiated in such cases.

Martha K. Guy, Esq., is an attorney at law in San Diego. She specializes in commercial real estate transactions, including leasing transactions, real property acquisitions and dispositions and numerous other transactional matters for her clients. With her background in both top-tier law firms and at senior executive levels in-house, Martha is uniquely able to provide both sophisticated legal experience and a business-oriented, cost-effective focus to her clients. Please contact Martha at (858) 551-0780 or martha@mguylaw.com.

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